Investors are finding fresh reasons to bet on an economic rebound.
Stocks jumped Thursday as gains in commodities like oil signaled that traders expect a strengthening economy will demand more energy.
Ample demand at an auction for Treasury debt also eased fears that the government would have to pay higher interest rates to entice buyers. Higher rates on long-term bonds would also drive up borrowing costs for consumers buying cars and homes, which in turn could endanger an economic recovery.
Major stock indicators rose more than 1%, including the Dow Jones industrial average, which gained almost 104 points.
It was the second straight day that interest rate movements called the shots in the stock market, and not likely the last. Analysts expect Wall Street will have to continue to grapple with worries that the government could eventually exhaust buyers' appetite for debt with an unprecedented level of bond sales as Washington funds its bank rescue and economic stimulus measures.
A jittery first half to the day's trading followed a drop a big drop Wednesday because of a spike in long-term interest rates as the yield on the 10-year bond jumped to its highest rate in six months.
Traders say the fractiousness could continue as investors look for data to prove that their bets this spring on an economic recovery were correct. The Standard & Poor's 500 index, considered the most reliable measure of the broader market, is still up 34% from a 12-year low in early March.
"The market is absolutely being held hostage to the data," said David Joy, chief market strategist at Ameriprise Financial's RiverSource Investments.
Joy pointed to the market's immediate reaction after the Treasury auction Thursday of $26 billion in 7-year notes, part of the $101 billion in debt the government offered this week. "There was a real sigh of relief," he said.
The Dow rose 103.78, or 1.3%, to 8,403.80. The S&P 500 index rose 13.77, or 1.5%, to 906.83, and the Nasdaq composite index advanced 20.71, or 1.2%, to 1,751.79.
The day's gains returned the S&P 500 index to the black for the year after it slid Wednesday. The Dow is down 4.3% in 2009, while the Nasdaq is up 11.1%.
The yield on the 10-year note skidded to 3.66% from 3.75% the day before. The yield, which moves in the opposite direction from the price of the note, reached its highest level since November on Wednesday.
Investors saw a bigger appetite for oil, as well as a dip in weekly unemployment claims and improving demand for big-ticket manufactured goods, as reasons to believe the economy will start growing and lift demand for raw materials.
Light, sweet crude rose $1.63 to settle at $65.08 a barrel on the New York Mercantile Exchange, a six-month high. That sent energy stocks higher. Marathon Oil Corp. jumped $1.77, or 6.1%, to $31.01, while Devon Energy rose $2.02, or 3.4%, to $62.31.
Analysts expect trading could remain bouncy as investors move beyond simply predicting the economy will recover and start looking for stronger signs of improvement. The uncertainty could make it difficult for the market to hold its gains, though many analysts don't expect stocks will fall again to the levels of early March.
"We're looking for a summer where the market is going to pretty much be trading sideways," said Brian Dolan, chief currency strategist at Forex.com.
The stock market logged its best month in nine years in April but the advances heading into the final day of trading for May are far more modest. Still, a gain for May would mark the third straight month of advances.
Trading was choppy in the first half of the day, following disappointing news on new home sales and foreclosures, while energy shares drew support from crude oil's advance.
The government said sales of new homes edged up only 0.3% in April, less than analysts expected. A separate report showed that a record 12% of mortgage holders were behind on payments or in foreclosure in the first quarter.
Investors were also focusing on General Motors, which said a committee of bondholders agreed to a sweetened deal to erase some of GM's unsecured debt in exchange for stock. The agreement may not prevent the automaker from seeking bankruptcy court protection, but investors are eager for any signs that a reorganization would be orderly. GM shares rose 15 cents, or 13%, to $1.30.
Homebuilder stocks fell after the disappointing reports on housing and as the prospect of higher interest rates stirred worries that already weak demand will worsen. Analysts say the housing market must find a bottom before the broader economy can recover.
"We still have headwinds ahead, in terms of the housing market going down," said Michael Sheldon, chief market strategist at RDM Financial Group.
Among builders, Toll Brothers fell 58 cents, or 3.2%, to $17.44, while Beazer Homes USA fell 18 cents, or 7%, to $2.39.
In other trading Thursday, the Russell 2000 index of smaller companies rose 2.35, or 0.5%, to 492.21.
About two stocks rose for every one that fell on the New YorkStock Exchange, where volume came to 1.4 billion shares, compared with 1.3 billion shares Wednesday.
The dollar was mixed against other major currencies. Gold prices rose.
Overseas, Britain's FTSE 100 fell 0.7%, Germany's DAX index fell 1.4%, and France's CAC-40 slid 0.8%. Japan's Nikkei stock average edged up 0.1%.